What is Repo Rate? What is the Current Repo Rate for 2022?

Repo rate is the rate of interest at which financial institutions borrow money from the RBI in times of a financial emergency. Recently, on August 2022, the Reserve Bank of India increased the repo rate to 5.40% by 50 bps. Regardless, it is essential to understand what rate is as it controls the economy and the market inflation.

How Does the Repo Rate Work?

Repo rates, as previously indicated, are employed to restrain market inflation. In order to stop the flow of money during inflation, the RBI raises the current repo rate, which neutralises inflation. Similarly, the RBI cuts the rate during a recession to boost the amount of money available in the market. Hence, the RBI determines the rate based on the nation’s economy.

Difference between Repo Rate and Reverse Repo Rate

The interest rate charged by the RBI to financial institutions for loans is known as a repo rate. On the contrary, the rate of interest offered by the RBI to financial institutions to deposit money in the RBI treasury is known as the reverse repo rate. Both of these significantly impact the home loan interest rate.

Difference Between Repo Rate and Bank Rate

There are four primary differences between repo and bank rates. These are: 

• Commercial banks and other financial entities borrow money at the Bank Rate without requiring security. In comparison, securities are used as loan collateral in Repo Rate.
• Since the RBI lends loans without collateral in the case of the former, Bank Rate is often higher than the repo rate.
• Also, loans at Bank Rate are often issued for a more extended period of time, whereas those at Repo Rate are intended for a shorter period of time.
• Despite the possibility that clients of commercial banks could be affected by changes to either rate, the Bank Rate more directly affects loan rates such as the home loan. Additionally, banks may take some time to adjust loan interest rates impacted by changes in the Rate due to a shorter time. Also, Rate typically affects expensive loans like home loans.

Importance of RBI Rate

The current rate issued by the RBI has considerable importance. A few of the most significant ones are:

• Repo rates help financial institutions keep their CRR and SLR ratios in check. The reverse rate is used by financial institutions that need government securities to maintain their SLR but do not need cash to support their CRR.
• A repurchase agreement is included with the rate. Because the borrower is willing to repurchase the security, the transaction has a low-risk level, which helps sustain the security’s liquidity. If it doesn’t, the securities can still be easily traded.
• Finally, this rate serves as a tool for managing liquidity and keeps the economic benchmark steady. Therefore, the RBI adjusts this rate up or down depending on the scenario of the economy in order to stabilise it.

This rate also determines the ROI and helps borrowers get better home loan interest rates. Hence it is essential to contact a lending institution concerning it. 

Prospective borrowers can also visit a reputed financial institution, which often provides pre-approved loan offers to expedite the loan application process. These offers are available on various products including home loans and loans against property. Borrowers can check their pre-approved loan offers from the official website of a lending institution. 

So, before availing of a home loan, it is essential to understand what repo rate is, as it will provide a fair idea about the interest rate. Additionally, knowing it can ease financial calculations and will help individuals manage their finances better.